Saudi Arabia has agreed with Russia to freeze oil output if they are joined by other large producers, in the first co-ordinated move to try to reduce a near record supply glut and halt the collapse in prices.
After watching oil prices fall 70 per cent since mid-2014, Saudi Arabia’s powerful oil minister Ali al-Naimi said an output freeze by some of the world’s major producers should start to stabilise the market.
The speed of the deal between the Opec powerbroker and the world’s largest crude oil producer surprised the market but traders remained sceptical that the provisional agreement would gain wider acceptance. Opec member Iran is seen as the biggest stumbling block.
The deal was reached at a behind-closed-doors meeting in Doha with Opec members Qatar and Venezuela.
Mohammad bin Saleh al-Sada, Qatar’s energy minister, said that the deal was still contingent on other major producers agreeing to join the freeze, which will probably complicate efforts.
In a bid to bring the most reluctant Opec members on board, Venezuela oil minister Eulogio del Pino, who has led the diplomatic push for a deal, will travel to Tehran on Wednesday to meet officials from Iran and Iraq.
Bijan Zanganeh, Iran’s oil minister, said that the country would not give up its share of the market, according to Iranian news agency Shana. The country has only just started raising exports following the lifting of sanctions last month.
News of the meeting between Saudi and Russian officials caused oil prices to spike as much as 6 per cent, but the formal announcement resulted in a sharp reversal as traders calculated that it may not remove a significant number of barrels from the market. Brent crude, the global benchmark, had fallen 4 per cent to $32.06 a barrel by 18:54 GMT, marking a 10 per cent intraday swing.
Mr Naimi said after the meeting: “Freezing now at the January level is adequate for the market, we believe . . . We recognise today the supply is going down because of current prices. We also recognise that demand is on the rise.”
A senior Opec Gulf delegate said that Saudi Arabia could take further action to help bolster the price, including output cuts if joined by other countries. “We will assess the situation and see if we need to go beyond freezing production,” the delegate said.
Opec has tried to defend its near 40 per cent share of the market by squeezing higher-cost rivals, including US shale and Brazil’s ultra-deepwater production.
The deal still marks the first significant supply agreement since Saudi Arabia led the cartel in maintaining production in November 2014.
The meeting between Saudi Arabia and Russia comes against a backdrop of strained political relations between the key players.
Iran has repeatedly said that it plans to revive its oil exports after the lifting of sanctions against its oil industry last month. This week it loaded the first three tankers with crude for Europe since 2012.
Iraq has also raised production to a record level in the past year following a decade of investment in its oil industry after the US-led invasion in 2003.
“Riyadh is trying to show the world and region that it is taking some action,” said John Sfakianakis, a Riyadh-based economist. “But the substantive issue is who cuts. The issue is that barrels need to be taken off the market, but the view in Riyadh is that we don’t want to be the ones to cut alone.”
Russia has previously said that it could not restrict output despite its economy sinking into recession as a result of the oil price collapse. Analysts said it may now be willing to compromise on output, even though many Gulf states doubt that Moscow will comply.
Russia’s oil production hit a post-Soviet-era high in January but output for the whole of 2016 is not expected to rise beyond 2015 levels. Alexander Novak, Russia’s energy minister, said that Moscow was “ready to freeze oil production at the level of January”.
US shale output, which surged in the first half of this decade, has proved surprisingly resilient to lower prices, although many smaller independent producers are facing financial difficulties this year. Globally, the oil price slide has resulted in investment cuts by oil majors of almost $400bn as companies drastically scale back plans.
Additional reporting by Simeon Kerr in Dubai
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